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Dubai moves to curb property speculation with bankers spooked by memories of the late ’90s

August 28, 2008 12:39 by



Scott MacMillan

A new UAE law issued this week intends to reduce the influence of short-term speculators on the property market, which remains searing hot even after years of growth. The law requires registration of sales of off-plan properties – that is, properties that are not yet built and exist only on paper – with the Land Department prior to being “flipped,” or re-sold on the secondary market.

Good move, but not enough, says the bank Standard Chartered: “The changes above will not be enough on their own to deter short term speculation and the ‘flipping’ of properties, but they are at least an indication that the regulators are indeed looking at ways of improving the overall business environment in the property market,” the bank said in a note Monday.

Last month Standard Chartered issued a set of recommendations designed to curb speculation. To start, the bank says government should introduce a capital gains tax on properties bought and sold within a period of 12 months.

Developers have praised the government’s move, saying it will reduce volatility, thereby instilling some measure of confidence in a market whose performance has caused a number of jaws to hit the sand.

Many developers are also following another of the bank’s recommendations on their own, requiring buyers to pay 20 to 30 percent of the property value before they can re-sell.

Why the sudden concern over speculation? What was once tacitly accepted as a sign of Dubai’s robust growth seems to have become a bogeyman lately.

Bankers with short memories are spooked by the US real estate correction, while those with longer ones recall, with some dread, the 1997 Asian financial crisis, when a group of booming property markets went through their first proper boom-and-bust cycle.

At the start of 2007, many said the Dubai property boom was at or nearing its peak, and that a looming oversupply meant a plateau or correction – if not an outright crash – was in the making. Funny that: Prices have risen 79 percent since then, according to Morgan Stanley. Rents have risen accordingly, as punters searching for accommodation will surely tell you.

Oddly enough, the proven inability of experts to accurately predict future property fluctuations hasn’t stopped the local press from issuing headlines oozing with drop-dead certainty.

Here’s the Khaleej Times: “Property prices to peak in 2009,” the daily flatly told us yesterday.

The misleading headline was based on a Reuters poll, which surveyed 10 financial analysts and came up with the following median forecast: Prices will jump 35 percent again this year before leveling off with a relatively modest 8.5 percent rise in 2009. Individual analysts’ predictions varied hugely. In fact, only five of nine analysts (apparently one of the 10, wisely, did not answer the question) said property prices would peak in 2009 – hardly a ringing majority, even putting aside the paltry size of the polling sample.

Morgan Stanley, the investment bank, meanwhile issued a research note earlier this month warning that the long-feared oversupply would finally start putting downward pressure on prices next year. The note predicted that prices would fall 10 percent by 2010 as supply growth finally starts to outpace surging demand.

A Singapore-style crash is unlikely, the investment bank added, yet it looms as a worst-case scenario. The concern echoes the fears of other bankers who are increasingly vocal about local banks’ exposure to a potential property price correction.

Dubai is increasingly reminding bankers of the late 1990s, when property prices in boomtown Singapore plummeted some 80 percent in dollar terms over a mere 18 months following a financial crisis that began with the crash of the Thai baht in 1997 and then spread like a bug.

Comparisons with the Southeast Asian statelet are complicated by the fact that Singapore’s currency was free-floating during the 1997 crash. In local terms, prices therefore actually fell “only” about 30 to 40 percent, with the Singaporean dollar absorbing the rest.

In the Gulf today, on the other hand, the UAE dirham would almost certainly appreciate were it to be cut loose from its dollar peg, buoyed as it is by an economy flush with liquidity and triple-digit oil prices.

Economic logic may suggest this upward pressure on the dirham may be one thing shielding property prices from a massive crash, but we’ll leave it at that: Unlike some local dailies, Kipp doesn’t possess superpower specs that reveal future movements of the market’s invisible hand.



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